Piper has $100M for growth firms

Piper Jaffray & Co. has launched a $100 million fund that will invest in companies poised for a growth spurt.

The Minneapolis-based investment bank closed on the growth-equity fund this summer. Piper already invested in two businesses: Shoreview-based medical-device maker Torax Medical Inc. and Harvest Power, a Waltham, Mass.-based company that converts organic waste into energy. Piper led Torax’s recent $30 million round of financing, Minnesota’s largest venture capital deal of the third quarter.

The bank’s growth-equity fund, Merchant Banking Fund I, expects to put up to $10 million into each company.

Piper’s merchant-banking business, which invests funds from Piper along with its clients, is managing the fund to back businesses that already are selling products and services, generating revenue and need funds for future growth. Such companies are at a later stage in development than startups, which typically seek money from venture capitalists. Growth equity separates itself from private equity by only taking minority stakes in portfolio companies.

“All of our companies will be commercial companies that have existing revenues and [are] growing revenues at a fairly rapid pace,” said Tom Schnettler, Piper’s vice chairman and managing director of its merchant banking business.

Piper has been making growth-equity investments since 2007, using its own capital. It completed 14 investments over a five-year period before seeking dollars for a new fund from outside investors, Schnettler said. Institutional investors and family offices added to Piper’s capital to form the new fund.

Industry focus

Piper will target companies in industries that its equity researchers already follow, such as health care, technology, consumer products, clean technology and business services.

“We’re trying to leverage the expertise we have in our research and banking teams, where we have dedicated industry experts,” Schnettler said.

Torax is a good example. The company received regulatory approval to market its Linx device, which treats patients who suffer from chronic acid reflux disease, this spring. It’s now ramping up sales of the device in the United States and Europe. The size of the market for Torax’s product, as well as the device itself, attracted Piper’s attention, Schnettler said.

“It’s a truly innovative and unique technology that appears to be very effective.”

Harvest Power, meanwhile, operates 28 plants that turn food scraps and other waste into fertilizer. The company told the Boston Business Journal it planned to begin operating two energy plants in September and was on track to generate $100 million in revenue this year.

Both Harvest Power and Torax raised several rounds of venture capital before attracting funding from Piper.

‘Big things to come’

Piper’s new fund is congruent with the firm’s pursuit of high-return activities like principal investing and asset management, according to analysts who follow the investment bank.

Piper’s new fund grows its merchant-banking business as larger banks, such as Goldman Sachs and Morgan Stanley, appear to be exiting ahead of proposed regulations that would limit bank trading and risk exposure, said Chicago-based Morningstar investment bank and brokerage analyst Michael Wong.

“It fits in with their current strategy and definitely could lead to bigger things down the road,” he said.

Investing its own capital will likely bring better returns than other activities, while managing the fund for other investors will be “less volatile than trading and less cyclical than investment banking,” said Credit Agricole Securities brokerage analyst Matt Fischer.